Penn Virginia Corporation

PVA : NYSE : US$14.76

Target: US$20.00

Investment recommendation
PVA has been successfully transitioning to a liquids-focused company
while retaining its leverage to an improvement in natural gas prices.
The company has built a sizeable ~86K net acre position in the volatile
oil window of the Eagle Ford (EF) and has generated solid results with
the drillbit while bringing costs down at the same time. We would be
buyers, especially after yesterday’s sell off.
Investment highlights
 In the EF, the company completed 16 (12.9 net) operated wells and
two (0.9 net) non-operated wells. EF production was 15.2 MBoe/d in
Q1, up 15% Q/Q, despite many completions coming later than
expected. PVA also increased its EF acreage to 85.9K, up 6.4K net
acres from last quarter and acquired at an attractive ~$3,000/acre.
 The Upper EF test yielded very solid results. The Welhausen #A2H,
drilled with a ~6,000 foot lateral and 26 frac stages, came on at a
peak gross IP rate of 2,165 Boe/d. Notably, this rate was higher
than the 1,767 Boe/d Devon posted in its presentation last week
which was based on 18 frac stages.
 PVA raised its EF inventory by 34% as it now includes the Upper EF
as a distinct horizon (475 gross locations). This increased inventory
figure is before giving any credit to overlapping locations, which the
company believes could add up to 400 additional locations. We are
now assigning value to the Upper EF in our NAV model, but we
believe there is still more upside as the bench is further de-risked.
Our new $20 price target represents a 10% discount applied to a
~$22.20 NAV. Our prior $19 target reflected the same discount to a $21 NAV

Penn Virginia Corporation Target Price $14

PVA : NYSE : US$11.31
Target: US$14.00

Penn Virginia Corporation is an exploration and production
company with operations in Texas, the Mid-Continent, Appalachia
and Mississippi.
All amounts in US$ unless otherwise noted.

Energy — Oil and Gas, Exploration and Production
Investment recommendation
PVA has successfully transitioned to a liquids-focused company while
retaining its leverage to an improvement in natural gas prices. The
company has built a sizeable position in the volatile oil window of the
Eagle Ford (EF) Shale and has generated solid results with the drillbit
while bringing costs down at the same time.
Investment highlights
 PVA has 72.2K net acres (and growing) in the EF, a very meaningful
position for a company its size. This represents a 10 year inventory,
with upside from downspacing and other formations, including the
upper EF which is in the early testing stages.
 Based on Devon’s announced acquisition of GeoSouthern’s EF
assets for $6B (82K net acres, 53 MBoe/d of production), PVA’s EF
assets alone (12.5 MBoe/d of production in Q3/13) could be worth
well over $2B, more than the EV of the entire company.
 In October, the company’s borrowing base was increased from
$350M to $425M. Pro forma liquidity at September 30, 2013 was
~$330M. Liquidity should be enhanced in H1/14 from the sale of the
EF gas gathering/gas pipeline assets (~$95M net to PVA, already
announced) and the divestiture of the Selma Chalk and Granite
Wash assets, which we believe could bring in as much as $150M.
Our new $14.00 price target is a ~15% discount from a $16.50 NAV. The
old price target of $12.00 was the same discount from a ~$14 NAV

Devon Energy / GeoSouthern Energy

DVN : NYSE : US$62.77
Target: US$86.00

Devon Energy is an oil and gas E&P company with assets in the U.S. and Canada. The company also has a significant midstream operation. It is headquartered in Oklahoma City, OK.
All amounts in US$ unless otherwise noted.

Energy — Oil and Gas, Exploration and Production
Investment recommendation
We view the possible acquisition of GeoSouthern Energy very positively since it would give DVN added running room to grow its oil volumes from a new position in the Eagle Ford Shale. A deal would bolster the already solid U.S. oil production growth it is getting from its emerging Permian and Miss-Woodford plays. We believe that greater oil growth and a higher mix of oil as a share of its total output are key elements to DVN receiving a higher valuation for its deeply undervalued E&P business.
Key points:
 Acquisition would substantially add to DVN’s U.S. oil production:
U.S. oil currently accounts for 12% of DVN’s total volumes and we project growth of 31% in 2014 and 23% in 2015. This deal would likely increase DVN’s oil production by a significant amount, as GeoSouthern is the 4th largest oil producer in the Eagle Ford. The private company produced 23 MBopd in 2012 – that amount alone would increase DVN’s U.S. oil volumes by over 25%.
 GeoSouthern has a very attractive acreage position in the Eagle Ford from being a “first mover” in this play: GeoSouthern has a 50% working interest in 173,000 gross acres in the Black Hawk field; its partner is BHP Billiton. The company also has 68,000 net acres further north in Fayette County.
 Eagle Ford is a great fit for DVN’s shale expertise: DVN famously was first to develop on a “mass manufacturing basis” in the Barnett Shale (TX); we believe it could achieve similar results in the Eagle Ford.
 DVN’s very strong balance sheet allows for a $6B acquisition: DVN’s net debt/cap ratio (pro forma for the Crosstex deal) is just 18%. With $4.3B of cash on hand, we believe the company is very much able to not only grow this asset quickly, but acquire other assets as well.

Sanchez Energy : Eagle Ford Play

SN : NYSE : US$24.92
Target: US$30.00

Investment recommendation
With over 140K net acres in the oil window of the Eagle Ford (EF) Shale, no company is more levered to the play relative to its size. Substantial production and cash flow growth should be the drivers to a higher stock price, in our view, as the company is now in full-scale development mode in the EF. A newly established 40K net acre position in the Tuscaloosa Marine Shale (TMS) provides future upside potential.
Investment highlights
 The company’s production growth is accelerating. After producing 1.9 MBoe/d in all of 2012, Q2/13 production was 7.7 MBoe/d with only one month of Cotulla. Current production pro forma for the Wycross acquisition is ~15.5 MBoe/d. Exit rate guidance for 2013 suggests a doubling or more from Q2/13 levels.
 SN is entering the TMS with a 40K net acre position in the core of the play that the company believes has over 200 MMBoe of recoverable resource. That said, over 90% of drill and complete (D&C) capex in 2013 is earmarked for the Eagle Ford as SN lets others test the TMS in the short to intermediate term.
 Both the recent equity and high-yield financings were upsized due strong demand. Pro forma for the sale of 9.6M shares of common and $200M of 7.75% Senior Notes, SN has over $500M of liquidity heading into an accelerated production growth phase.

Matador Resources


NYSE : US$11.89 BUY 
Target: US$13.00

Matador Resources is a Dallas, Texas-based E&P with core producing assets in the Eagle Ford and Haynesville.
Founded in July 2003 by its current CEO, Joseph Foran, MTDR went public in Feb 2012 with ~13.3mm outstanding shares priced at $12.
All amounts in US$ unless otherwise noted.


Strong production from Eagle Ford to continue in 2Q We had the opportunity to meet Matador Resources in its office this week and, following our discussions, we expect the company to report strong production this quarter. As announced earlier, MTDR completed seven operated wells in the Eagle Ford including three in DeWitt County and four in LaSalle County. All seven wells seem to have performed at or  above expectations. Included in the four wells in LaSalle County is a 40- acre pilot test that is currently flowing, with results expected on the 2Q call. It might be recalled that LaSalle acreage is Tier 1 (>20% IRR) and we have modeled locations on an 80-acre spacing in our base-case NAV.
Notably, MTDR has implemented several operational procedures – increasing frac stages, decreasing cluster spacing, increasing frac fluid –that have generated strong IPs. Further, putting wells on artificial lift  has helped shut-in wells recover prior production levels. Since impacts of operational procedures are long dated, we believe MTDR will continue to improve resource quality and maximize asset potential.
Permian exploration in progress, results expected in 3Q In 2Q13, MTDR moved a rig from the Eagle Ford to the Permian to drill  and test a three-well program. MTDR has completed its first well and is now drilling a second well in Lea County (Delaware Basin). MTDR had initially planned to move the rig back to Eagle Ford at the end of 2Q; that then got extended to September. Probably due to encouraging data, management is considering keeping the rig in Permian while employing a second rig in Eagle Ford. In our view, Delaware Basin might open up a new fairway for MTDR and along with Eagle Ford downspacing, addressing one of the key concerns: drilling inventory.

Halcon Resources

Rectangular joints in siltstone and black shal...

Rectangular joints in siltstone and black shale within the Utica Shale (Ordovician) near Fort Plain, New York. (Photo credit: Wikipedia)

HK : NYSE : US$5.34
Target: US$8.50

Halcon Resources is an independent energy company engaged in the acquisition, production, exploration and development of onshore oil and natural gas properties in the United States. The company has oil and natural gas reserves located in several key areas including the Bakken,  Woodbine/Eagle Ford, Utica, Midway/Navarro, Wilcox, Mississippi Lime and Tuscaloosa Marine.

Investment recommendation
HK has built positions in some of the most exciting liquids-rich resource plays in the US, including the Utica Shale and Williston Basin (WB). A new Eagle Ford (EF) play called El Halcon was also recently unveiled, and the Wilcox has been moved to the forefront. We believe HK is well positioned to rapidly grow production and cash flow, which we believe in turn should be a catalyst for a higher stock price.
Investment highlights
 HK announced Thursday it priced a $300M public offering of 5.75% Series A Cumulative Perpetual Convertible Preferred Stock. The conversion price is ~$6.16, resulting in an additional ~48.7M diluted shares. The underwriters have an over-allotment option for an additional $45M. The company expects to use the estimated net proceeds of $291M to pay down a portion of its revolver, which had $591M drawn on its $850M borrowing base as of June 7.
 We are lowering our 2013 and 2014 EPS/CFPS estimates due to an increased share count and the addition of preferred dividends. Our 2013E numbers to go $0.31/$1.39 from $0.35/$1.47 and 2014E goes to $0.63/$2.30 from $0.72/$2.52.
Our new $8.50 price target represents a ~20% discount to a $10.55 NAV (down from a $9 price target and $11.25 NAV with the same discount

Argent Energy Trust

Schematic E-W section showing the Eagle Ford S...

Schematic E-W section showing the Eagle Ford Shale among the geological strata beneath the DFW Metroplex (Photo credit: Wikipedia)

AET.UN : TSX : C$10.58
Target: C$13.00

Argent is a “mutual fund trust” under the Income Tax Act (Canada). Argent’s objectives are to create stable, consistent returns for investors through the acquisition and development of oil and natural gas reserves and production with low-risk exploitation potential, located primarily in the US, and to pay out a portion of available cash to holders of the trust’s units on a monthly basis.

We are initiating coverage with a BUY rating and $13.00 target Our price target is based on 1.1x our estimated risked NAV. We have the brightest outlook for Argent amongst the cross-border energy trusts at this time and believe it has in place the pieces to outperform. We believe the
trust is poised to deliver on its targeted 5-10% per annum growth along with its ~10% yield (which we estimate is safe down to $70/bbl WTI). We
support our rating with three points:

1. Eagle Ford acreage offers significant upside potential Argent has identified over 180 locations (80-acre spacing) on its most prospective Eagle Ford acreage. We estimate there to be almost $9.00/ unit of unrisked upside. Furthermore, industry activity has been trending toward downspacing, which could theoretically add an incremental ~90 locations (40-acre spacing) and bring the unrisked upside potential to  13.00/unit. We are risking the Eagle Ford by 80% (80-acre spacing), which translates to ~$2.70/unit in our price target. We estimate the
market is only pricing in ~$1.30/unit in Eagle Ford value.

2. AET.un generates premium netbacks and significant cash flow With U.S. operations, Argent enjoys higher realized crude pricing (LLS based) and lower costs compared to peers in Canada. We are forecasting AET.un to have the second-highest netback in our coverage at over $40/boe compared to the peer avg. of ~$31/boe. This should allow AET.un to grow production by 8-10% by just spending 50-60% of cash flow.

3. Solid financial flexibility Argent’s recently added leverage ($86.3mm of convertibles) to accelerate its Eagle Ford activity is easily supported by its balance sheet. The company’s strong cash-flow-generating ability is expected to quickly bring AET.un’s net-debt-to-annualized CF metric back down to 1.4x in 2014 and lower going forward. The $115mm undrawn LOC provides flexibility to pursue accretive opportunities or weather crude price volatility.

EOG Resources

TITLE: Sod house. McKenzie County, North Dakota

TITLE: Sod house. McKenzie County, North Dakota (Photo credit: Wikipedia)

EOG : NYSE : US$135.69
Target: US$194.00

Investment thesis
We increased our target price $18 to $194 per share due to ~10% increase in capital productivity (underpinned by the Eagle Ford) and a
higher oil price realization. The Eagle Ford comprises almost 50% of EOG’s capital outlays this year. Simply put, EOG’s Eagle Ford leasehold
generates the highest returns of any large-scale NAM resource play.
Our liquids growth outlook of ~28% is toward the high end of guidance (16%-30%). The calibration of capital and production imply EOG’s
capital productivity is ~15% superior to industry (liquids-normalized).
Investment highlights
 Further improvement in Eagle Ford well performance: In the latest quarter, ~20 select wells in Gonzales/Karnes Counties (“east area”)
commenced production at over 4,000 Boepd (~90% liquids) suggesting recoveries of 2,000+ Mboe. Year-to-date, Eagle Ford wells have commenced production at ~1,200 Bopd the first 30 days, suggesting a recovery of ~850 Mbo for a cost of ~$6 million per well.
This represents a ~30% improvement in well performance versus last year. Wells in the “east area” average ~1,600 Boepd the first 30 days, suggesting recoveries of 1,000-1,100 Mboe and wells in the “west area” average ~800 Boepd the first 30 days, suggesting recoveries of 500-600 Mboe.
 Strong initial Three Forks Second Bench test, continued robust 160- acre down spaced results in core Parshall field: Recent infill Bakken
tests in the Parshall field on 160-acre spacing have commenced production at an average 30-day rate of ~2,000 Bopd, suggesting recoveries of ~1,000 Mbo per well. In the Antelope area, southwest of the Parshall field in McKenzie County, a Three Forks Second Bench test commenced at 3,150 Bopd.

Comstock Resources Target $ 30

Schematic E-W section showing the Eagle Ford S...

Schematic E-W section showing the Eagle Ford Shale among the geological strata beneath the DFW Metroplex (Photo credit: Wikipedia)

CRK : NYSE : US$15.66
Target: US$30.00

Comstock Resources is an exploration and production company focused on development of the Eagle Ford Shale, the Permian Basin and the Haynesville Shale.


Investment thesis
We are increasing our target price $1 to $30 per share following model refinements. To clearly illustrate Comstock’s deep value opportunity, CRK trades at ~30% discount to the group (’13E EBITDA) though should generate ~50% stronger CFPS growth (‘13-‘15E) via Eagle Ford execution. Accordingly, we feel CRK has 80%+ upside vs. the group’s 30%+ upside.
Permian divestiture eliminates capital structure concern
Pro forma the sale, Comstock’s net debt-to-EBITDA at year-end ’13 declines from ~3.5x to ~1.9x, which is in line with the industry median, and net debt-to-EBITDA should modestly decline thereafter assuming ~$500 million per annum capital plan.
Accelerating Eagle Ford development/volume ramp
As a consequence of the liquidity provided by the Permian sale, the company is increasing Eagle Ford activity from three to six rigs in 2H13 and plans to drill 72 gross wells (~65% WI) this year. McMullen County comprises ~90% of this year’s activity (four- to five-year drilling inventory). We believe acceleration in Eagle Ford activity should drive almost 20% quarterly oil production growth the balance of the year and oil production should exit the year at ~8.5 Mbopd vs. 4.8 Mbopd in 1Q/13.
Improving Eagle Ford results
In 1Q/13, Comstock Eagle Ford wells averaged ~670 Boepd the first 30 days, suggesting recoveries of almost 500 Mboe, which was a ~10% improvement in well performance q/q normalized for lateral length.
Overall capital productivity enhanced by ~10% with Eagle Ford JV
The company’s Eagle Ford JV assigns a one-third interest for the equivalent of $25k per acre. Assuming 80-acre spacing, the partner pays $0.67 million and receives a one-third interest in each well. In essence, the JV is funding ~10% ($30+ million) of the company’s ’13 capital plan

Abraxas Petroleum Eagle Ford / Williston Future

Map of Texas highlighting McMullen County

Map of Texas highlighting McMullen County (Photo credit: Wikipedia)

Target: US$3.00

Abraxas Petroleum Corporation, an independent energy company, engages in the acquisition, development, exploration, and production of oil and gas principally in the Rocky Mountain, Mid-Continent, Permian Basin, and Gulf Coast regions of the United States. The company was founded in 1977 and is based in San Antonio, Texas.

Investment recommendation
AXAS has solid positions in two of the leading unconventional resource plays in the US in the Williston Basin (WB) and Eagle Ford (EF). We
believe strong production and cash flow growth, along with deleveraging the balance sheet, will be catalysts to drive a higher stock price.
Investment highlights
 Continued success in the EF: In McMullen County, the Gran Torino A 1H averaged 790 Boe/d (89% oil) on a restricted choke over its initial
30 days and is currently flowing to sales at a rate of 720 Boe/d (88% oil). The Mustang 3H, which was brought online for ~$6.2M in mid/late March, continues to outperform AXAS’ 575 MBoe EUR type curve while the Mustang 2H is currently being completed with a 19- stage frac. AXAS owns an 18.75% working interest (WI) in all mentioned EF wells.
 producing ~150 Boe/d before being shut in during the 2H and 3H completions. AXAS owns a 49% WI in the Ravin wells.


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